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Will U.S. ethanol demand fade?

A couple of weeks ago, New Holland held a field day near the Minnesota-Iowa state border to show off some of its cash crop equipment. It was blended with a tour of a local ethanol plant. Currently, the U.S. ethanol industry is at risk of seeing a significant decline in demand for its product if the Renewable Fuels Standard in the U.S. is discontinued, as some lobbyist are asking for.

 

That would be bad news for farmers, because demand for the thousands of tonnes of corn needed to keep U.S. ethanol production at current levels would disappear along with the refining plants that consume them. With commodity prices already falling, slackening demand would push them even lower.

 

Executives in the ethanol industry in the U.S. are getting a little nervous. And that was evident with those I spoke to in Iowa. Ethanol, they told me, has been good for the rural U.S. Midwest. It’s been a significant driver in the economy there, helping isolate the region from much of the economic crisis affecting the country. Aside from direct job creation, there have been many economic spinoffs. Enhanced infrastructure is one.

 

Don Burns explains how ethanol is produced at the Absolute Energy plant in Iowa

Don Burns explains how ethanol is produced at the Absolute Energy plant in Iowa

In order to move product from rural ethanol plants, railroads have upgraded lines and increased the number of trains on them. That has been a benefit to other manufacturing sectors in the region, which can now better move their products in a more timely fashion. And, of course, farmers’ grain can move down those improved rail lines as well.

 

New Holland has been a major proponent of the ethanol industry. Abe Hughes II, the company’s North American V.P., was recently in Washington trying to lobby on the industry’s behalf.

 

But we in Canada have never had any influence in U.S. political affairs—and likely never will, even when decisions there directly affect us. However, I don’t think that means we should be disinterested in what goes on down south, especially with the ethanol debate. If the U.S. industry declines, and with it the demand for corn, farmers here will feel the pain too. Our cereal grain prices will probably see a slide.

 

When talking to Rick Schwarck, chairman, president and CEO of Absolute Energy, an ethanol producer, he brought up another interesting angle he thinks people should consider about maintaining strong farm commodity prices, in which ethanol plays a part. Higher prices have been good for a great many people around the world, particularly those in third-world countries where agriculture accounts for the majority of national GDP.

 

His point is that simply keeping demand high and prices strong has raised the standard of living for many in a way that no aid from Western Nations ever has. It’s a kind of no-cost, effective foreign aid program.

 

Of course, that brings up the food-versus-fuel debate which has hovered around the ethanol industry. But that’s a non-starter, as Schwarck sees it. Because ethanol production only removes the starch from corn, the by-product, corn meal, can be used as animal feed. Meal makes for even better feed than raw grains because it is more densely packed with nutrients. So it’s easier and cheaper to ship overseas, and it now demands a price premium, which raises the value of a crop. In short, it isn’t an either-or situation.

 

There are valid reasons to justify keeping the Renewable Fuels Standard in place, which helps keep demand for farm commodities strong. But with a significant segment of the general public easily spurred into action on the strength of popular misconceptions, will the reasons to support the industry prevail?

 

In fact, many of the conversations swirling around agriculture in general are littered with misconceptions. Now, combine that problem with an overabundance of ideologically-motivated politicians in the U.S. and Canada that are clearly more concerned with enacting legislation designed to produce votes rather than providing good, responsible governance. It’s no wonder ethanol executives are nervous.

 

Scott

About the author

Machinery Editor

Scott Garvey is the machinery editor for Grainews.

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